Winston & Strawn v. Nosal

Citations: 664 N.E.2d 239; 279 Ill. App. 3d 231; 215 Ill. Dec. 842; 1996 Ill. App. LEXIS 269Docket: 1-95-0819

Court: Appellate Court of Illinois; March 29, 1996; Illinois; State Appellate Court

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Chester W. Nosal was expelled from the partnership of Winston & Strawn, prompting Winston to seek a declaration that the expulsion was valid under their partnership agreement and did not dissolve the partnership. Nosal counterclaimed, asserting that his expulsion was invalid, breached fiduciary duties, and resulted in the dissolution of the partnership. The trial court granted summary judgment for Winston, confirming that the expulsion was enacted under a valid partnership agreement and did not lead to dissolution. Nosal contested that the expulsion violated the partnership agreement's enactment requirements and fiduciary duties. The court's decision was based on depositions from various partners, supporting Winston's position against Nosal's claims, which relied heavily on his own testimony and that of other partners.

The court upheld the validity of the 1987 partnership agreement and affirmed that Nosal's expulsion adhered to its terms and did not violate any duty of good faith. It ruled that the expulsion did not lead to a dissolution of the partnership. Nosal contended on appeal that his expulsion was invalid, arguing that the firm was still governed by the prior 1984 agreement, which required a vote involving both capital and non-capital partners for expulsion, and claimed that the 1987 agreement was never properly adopted. The 1984 agreement stipulated that a majority of capital partners managed firm activities, with specific voting requirements for expulsion. In contrast, the 1987 agreement allowed expulsion with a two-thirds majority of capital partners without needing non-capital partner votes and maintained that no cause or hearing was necessary for expulsion. Although Nosal's expulsion received approval from 55 of 71 capital partners—exceeding the two-thirds threshold of the 1987 agreement—he argued that the lack of a non-capital partner vote rendered it invalid. Winston countered that the 1987 agreement was validly enacted and that even under the 1984 agreement, sufficient votes existed for his termination. The court noted that summary judgment is appropriate if there are no genuine material facts in dispute, allowing judgment as a matter of law, and emphasized that its review of summary judgment orders is de novo.

The trial court accepted certain evidence from Winston as credible, which is inappropriate for summary judgment considerations. Although there was a sufficient number of votes to expel Nosal under the 1987 agreement, a dispute exists regarding the validity of that agreement. Nonetheless, this issue is not material since expulsion was effectively executed under the 1984 agreement, which required 75% of votes from capital partners and 25% from non-capital partners for expulsion. Despite the non-capital partners not voting, 76% of capital partners approved Nosal's expulsion, achieving a 57% majority of all eligible votes. Nosal claims his expulsion was void under section 18(h) of the Uniform Partnership Act, which requires consent from all partners for actions contrary to their agreement. However, given the overwhelming support from capital partners, the lack of a non-capital partner vote did not significantly infringe on Nosal's rights under the 1984 agreement, which did not stipulate a requirement for such a vote. Additionally, there was no requirement for a hearing or "just cause" prior to expulsion. Nosal further argues that his expulsion violated the implicit duty of good faith due to his requests for firm records, which he claims would have exposed misconduct. Winston counters that the expulsion was valid based on the necessary votes.

From 1988 until his outplacement, Nosal repeatedly requested access to Fairchild's financial records, including financial statements, compensation details, and executive committee meeting minutes, citing a partnership agreement provision granting all partners access to the firm's books and records. Nosal's affidavit indicated that Fairchild initially delayed and promised some records but ultimately only provided audited financial statements and refused further cooperation, a fact supported by Austin's deposition, who similarly sought information on partner compensation. In March 1991, Nosal expressed dissatisfaction with the lack of access and later made a written request to partner Loren Wittner in May 1991. Fairchild responded two months later with the audited statements but stated no additional documents would be shared, claiming compliance with the partnership agreement and executive committee directives.

In August 1991, as capital partners considered an amendment to the partnership agreement, Nosal opposed the proposal due to Fairchild's ongoing refusal to disclose management and compensation information. Despite his objections, the amendment passed. On September 23, 1991, Nosal again sought access to firm records, receiving a response requesting a meeting to address his discontent. In fall 1991, Fairchild proposed a revised partnership agreement, to which Nosal submitted comments, challenging the 1987 agreement's validity and demanding full disclosure from the executive committee regarding prior management and compensation practices. He criticized the executive committee's extensive authority and the current compensation structure.

Later, Fairchild discussed "partner outplacement" in a capital partners meeting, indicating a need to adjust the firm to align with market demands. On March 23, 1992, approximately 19 partners were notified of their outplacement, but Nosal was not among them and was assured by partner McGarry that he was not a candidate for outplacement. McGarry also acknowledged that Nosal's contributions had exceeded projections and recommended an increase in his ownership points.

Nosal received notice from Fairchild regarding an increase in his compensation. During a partnership meeting on March 24, 1992, he expressed dissatisfaction with the executive committee's decision to expel partners, claiming it violated the partnership agreement and demanding access to financial records from 1987 onward. Following this, Nosal made a final request for partnership information and presented Fairchild with a draft complaint seeking to enforce his right to inspect records, an accounting, damages for breach of fiduciary duty, and a declaratory judgment regarding the partnership agreement. Fairchild destroyed the draft complaint. On April 2, 1992, Nosal was notified of his impending outplacement, which occurred shortly after a meeting addressing his information requests. Fairchild, McGarry, and Goodman stated that Nosal's outplacement was due to his practice focus being incompatible with the firm and his "disturbing" conduct. On May 6, 1992, capital partners voted to expel him. 

A fiduciary relationship exists among partners, mandating the utmost good faith and honesty in partnership matters, which includes prohibiting secret dealings and requiring full disclosure of partnership business. Although Illinois law has not explicitly defined the extent of the duty of good faith in partner expulsion, other jurisdictions affirm that partners owe a duty of good faith in such contexts, even when expulsion is permitted without cause. The partnership agreement allows expulsion with majority approval and guarantees all partners access to partnership books and records, which is supported under Illinois law.

Nosal asserts that the documents he requested would demonstrate the executive committee's strategy to consolidate wealth and management authority within the firm. He claims these documents would have shown that, without notifying other capital partners, the executive committee significantly increased their ownership "points" and granted themselves substantial raises in 1990, actions that were not communicated to the other partners. Nosal contends that his requests for these documents, guaranteed under the partnership agreement, were repeatedly denied. Although Fairchild testified that the executive committee could allocate points, the actions taken lacked transparency and did not reflect the necessary good faith owed to the other partners. Nosal also alleges that Fairchild intentionally withheld information that could have exposed fraudulent billing practices. 

Following Nosal's requests for sensitive information and a draft complaint threatening legal action, he was abruptly outplaced from the firm, despite a recent positive review. The circumstances surrounding his outplacement raise suspicions that it was a retaliatory act for asserting his rights under the partnership agreement. The court acknowledges that while partners have discretion under the agreement, they must still act with good faith, and Nosal has raised a legitimate issue regarding the breach of this duty.

The trial court's summary judgment favoring Winston on Nosal's counterclaim for partnership dissolution was assessed. Despite the partnership agreements stating that a partner’s expulsion does not terminate the partnership, wrongful exclusion can warrant judicial dissolution. The court reverses the summary judgment regarding Nosal's bad faith expulsion and the related dissolution question, remanding for further proceedings. Additionally, count II of Nosal's counterclaim for an accounting remains pending and is not part of this appeal.